Tappy’s Revenge: What You Need to Know About the DOJ’s Momentous Trade Secret Indictment of Huawei

Last week, in a significant development in the simmering IP and technology dispute between the U.S. and China, the U.S. Department of Justice unsealed an indictment filed in the U.S. District Court for the Western District of Washington against Chinese telecommunications manufacturer Huawei for the theft of trade secrets from T-Mobile. This salvo is the latest in an increasingly high stakes confrontation between the U.S. and China arising from longstanding concerns in the U.S. about China’s involvement in and support for the theft of trade secrets from U.S. companies. Huawei, which was also the subject of a FBI sting last month in another unrelated trade secret investigation involving a U.S. smartphone screen manufacturer, is now at the center of this international IP superpower row. What’s the international context that led to this indictment, what did Huawei do to trigger the indictment, and what forces are now in play that will shape the prosecution going forward? Read on for my thoughts below.

How We Got Here: U.S. Complaints about Theft of Trade Secrets by Chinese companies. Some in the media have recently written that the Huawei indictment reflects a break from past administrations and demonstrates a greater willingness to use U.S. criminal law to resolve trade differences. That’s not correct. Previous administrations have overseen dozens of criminal proceedings against Chinese companies and nationals for trade secret theft in the past. In fact, the Economic Espionage Act (EEA), 18 U.S.C. §1831, et seq., has been the primary vehicle for seeking redress against Chinese actors, largely because state courts lack the ability to provide an effective forum to international disputes and because the Defend Trade Secrets Act, which was intended to provide extraterritorial protection to U.S. companies for civil trade secret cases, is in its infancy.

Chinese nationals and companies have accounted for a significant number of the prosecutions under the EEA. According to a recent post written by Peter Toren, a former federal prosecutor and IP litigator, “of the 178 cases involving alleged violations of Section 1832 [which is the primary trade secret provision of the EEA], 50 (28 percent) have a connection to the PRC [Peoples Republic of China]. The percentage is even higher with regard to Section 1831 cases [the section addressing government espionage]: of the 16 cases, eleven (69 percent) involve allegations of PRC government involvement. In addition, of the ten prosecutions brought in the last year, six have a Chinese connection.”

U.S. companies have long complained about China’s toleration of, if not outright support for, the theft of important agricultural, technological and strategic trade secrets by Chinese companies and nationals. One of the early catalysts for federal action was American Superconductor’s highly -publicized claims that its Chinese partner, Sinovel Wind Group, stole its wind turbine technology, causing it to lose an estimated to be $1 billion in market value.

In response to these concerns, in February 2013, the Obama Administration launched its trade secret initiative focusing on diplomatic, prosecutorial and educational efforts to protect U.S. technology and trade secrets abroad. While the initiative did not formally identify China, its launch coincided with reports of significant cyberattacks by the Chinese military. The following week, a front-page article in The New York Times called out China’s army for its role in hacking U.S. companies, citing a report by the security firm Mandiant that fingered Unit 61398 of the Peoples Liberation Army as having a role in 141 attacks in recent years.

The Obama Administration had also fired a broadside the year before (2012), initiating a criminal proceeding against a company (the Pangang Group) owned in part by a high-ranking official of the PRC. That case arose out allegations over the theft of DuPont’s trade secrets for a compound known as titanium dioxide that had military and other strategic applications. As I wrote at that time, this prosecution was significant because it was the first one against a company with ties to the PRC.

The Trump Administration has doubled down on this approach, taking an aggressive tone in its negotiations with China. In November 2018, U.S. Attorney General Jeff Sessions announced the creation of a China Initiative spearheaded by Assistant Attorney General John Demers, who heads the DOJ’s National Security Division, and composed of a senior FBI Executives, 5 United States Attorneys and several other DOJ leaders and officials. AG Sessions said this Initiative would identify priority Chinese trade theft cases, ensure that the DOJ has enough resources dedicated to them, and make sure that they are brought to an appropriate conclusion quickly and effectively.

Why Huawei? Huawei is the second largest manufacturer of smartphones in the world. While it is perceived as a mammoth player in the telecommunications industry, Huawei has been unable to make inroads into the U.S. market. This is largely due to U.S. concerns about Huawei’s access to sensitive information of U.S. consumers and companies, potential backdoors in its products that might facilitate breaches or misappropriation, and its perceived coziness to the PRC and its military.

Huawei has been the subject of concern for some time. Motorola and Cisco both filed claims accusing Huawei of misappropriating their proprietary information. In 2012, the House Intelligence Committee issued a report accusing Huawei and fellow Chinese company ZTE of posing a threat to the national security of the U.S. and discouraging U.S. companies from purchasing their products. And last February, FBI Director Christopher Wray cautioned against purchasing phones manufactured by Huawei. In October 2018, Huawei’s CFO, Meng Wanzhou (who is also the daughter of Huawei’s founder) was arrested in Canada at the request of the U.S., setting off a diplomatic firestorm. For those looking for more, a comprehensive timeline detailing the many concerns about Huawei in the U.S. and elsewhere can be found here.

What does the indictment reveal? The trade secret allegations against Huawei in the Seattle indictment were announced along with a companion indictment filed in the U.S. District Court for the Eastern District of New York, accusing Huawei and Ms. Meng of defrauding four banks in connection with clearing transactions with Iran through a subsidiary.

The trade secret indictment has raised some eyebrows because the allegations were the subject of an earlier inconclusive civil lawsuit between Huawei and T-Mobile in a federal court in Seattle, Washington. In that case, the jury found for T-Mobile on various claims, including the misappropriation of trade secrets claim, but it only awarded T-Mobile $4.8 million in damages; T-Mobile asked for over $300 million in compensatory and punitive damages and it spent at least $18.5 million in attorneys fees. The fact that the prosecution follows approximately 7 years after the allegations of theft, and 2 years after the civil litigation’s verdict is unusual. In many federal prosecutions, the DOJ typically takes the lead or at least aggressively pursues the litigation simultaneous with any civil litigation.

The trade secret indictment, a copy of which can be found here, lays out a brazen but relatively low-tech scheme. In 2011, Huawei’s USA entered into a supply agreement with T-Mobile, with an eye to gaining a foothold in the U.S. cellphone market, the third largest in the world. As part of that and subsequent agreements, Huawei agreed to several non-disclosure agreements with T-Mobile to protect T-Mobile’s confidential information. During this time, Huawei had developed its own robot, xDeviceRobot, to test and improve the quality of its phones but that robot experienced enough problems that Huawei approached T-Mobile about licensing the technology for Tappy so that it could improve its xDeviceRobot.

After T-Mobile declined, Huawei allegedly set upon a course to get the information by other means in 2012 and 2013, primarily by having Huawei USA’s team take photographs of Tappy and gather details about its technical specifications and software interface system. When T-Mobile resisted, the indictment asserts that Huawei resorted to other means including having Huawei USA facilitate the trespass of a Huawei engineer from China into T-Mobile’s laboratory; that employee repeatedly returned to the laboratory to take photographs even after being discovered by T-Mobile employees and told to leave. In May 2013, one of Huawei’s employees literally removed Tappy’s arm from the laboratory so that he could photograph and study it offsite.

When it learned of the removal of the robotic arm, T-Mobile terminated Huawei’s access to the laboratory. To allay T-Mobile’s concerns and avoid further controversy, Huawei claimed the entire episode was a mistake and issued a long report that the individuals had acted on their own and without Huawei’s support. Huawei, however, declined to provide T-Mobile with its back up for the investigation and according to the indictment, misled T-Mobile about the extent of email traffic and internal Huawei support for the alleged theft.

One of the more interesting elements in the indictment is the allegation that Huawei “launched a formal policy instituting a bonus program to reward employees who stole confidential information from competitors.” According to the indictment:

Employees were directed to post confidential information obtained from other companies on an internal Huawei website, or, in case of especially sensitive information, to send an encrypted email to a special email mailbox. A “competition management group” was tasked with reviewing the submissions and awarding monthly bonuses to the employees who provided the most valuable stolen information. Biannual awards were made available to the top three regions that provided the most valuable information. The policy emphasized that no employees would be punished for taking actions in accordance with the policy.

The indictment also includes charges for wire fraud (which is frequently included in many criminal indictments) and obstruction of justice. The obstruction of justice count is an interesting claim as it is rooted in Huawei’s efforts to “corruptly obstruct, influence and impede an official proceeding” — namely, its defense of the civil lawsuit brought by T-Mobile.

Why is this latest development significant? Again, the timing and nature of the indictment is curious because it addresses events from 2012-2013 that were the subject of a disappointing civil litigation. In addition, the allegations giving rise to the indictment, while serious, are not especially different from any civil trade secrets case; they are grounded in facts over a relatively narrow period of time with a limited number of individuals over a single device.

Whatever its substantive merit, this is a significant indictment of a major Chinese company. From my vantage point, there are three factors at play here:

Huawei brings a lot of baggage to the indictment. Huawei has been the subject of criticism from federal legislators and administration officials before and as the chronology cited above indicates, other Western countries have voiced similar security concerns (the recent dismissal of an employee for spying in Poland as but the latest example). And the recently-revealed FBI sting demonstrates that the U.S. government is aggressively following up on accusations of trade secret theft with other U.S. companies. Huawei has its supporters, who view the current indictments as a misguided prosecution and part of a broader effort of U.S. protectionism. But Huawei has not done itself any favors in this debate.

The U.S. has concerns about Huawei’s potential misuse of the access provided under the next-generation 5G network. In a recent op-ed piece in The Wall Street Journal, former U.S. House Representative Steve Rogers lays out the case that the 5G network’s sensory endpoints could be compromised and use to spy on end-users; likewise, a recent editorial in The Washington Post expressed a similar concern about allowing Huawei access to the 5G network in wake of the indictment.

This is a “brushback pitch” at China and the way it is perceived to have done business. Dan Harris’ recent post on the Huawei indictment in his excellent China Law Blog provides a stark reminder about the dilemmas that many U.S. companies believe they face when doing business in China. I would commend that anyone interested in more fully understanding that perspective read that post. Some want to paint this as a chess move in larger trade battle between the U.S. and China. It may well be. But these complaints have been consistent and longstanding and cannot be easily dismissed as sour grapes.

I will continue to monitor the case and I am sure there will be more posts to follow.

About this Blog

I’m a Columbus, Ohio-based attorney with a national legal practice in trade secret, non-compete, and emergency litigation. Thanks for visiting my blog. I invite you to join in the conversations here by leaving a comment or sending me an email at jmarsh@baileycav.com.

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